The Bank of Ceylon maiden debenture issue is tipped to be a success partly because the bank is 100 percent owned and backed by the state, said the managers of the issue, Merchant Bank of Sri Lanka PLC (MBSL), who are confident it would enjoy the same success as Janashakthi Insurance when they entered the stock exchange earlier this year. The insurance companies initial offering of 16.5 million shares had been oversubscribed four times-over and the second offering, also of 16.5 million shares, had been oversubscribed within the first three and half hours on its opening day. The insurance company had collected around Rs. 900 million. The Chairman of MBSL said obscene corporate governance and the failure of capitalism had led to the breakdown of western financial systems with many banks and financial institutions being taken over by the governments of the EU and US. "Many said that socialism failed but the world economic situation today shows that capitalism has failed too. The trend is for governments to takeover banks and I think this will soon be the case in Asia as well," Head of MBSL Janaka Ratnayake said. He made these comments to the Island Financial Review after state-owned Bank of Ceylon announced it would raise Rs.3 billion Unsecured Subordinated Redeemable Five Year Debentures which will be listed on the main board of the Colombo Stock Exchange. If oversubscribed, the bank has an option to raise another Rs.2 billion and take the total to Rs.5 billion. Apart from the bank’s strong financial position MBSL, manager, sponsor and registrar of the bank’s debut at the capital market, believes the bank’s strength lies in the fact that it is 100 percent state-owned and depositors’ funds are guaranteed. Meanwhile, the Chief Financial Officer of Bank of Ceylon, Saliya Rajakaruna, believes that interests will come down in the future. The Central Bank has already relaxed the reverse repo window allowing the commercial banks to borrow overnight funds from the Central Bank at cheaper rates than the interbank rate 10 times a month from three. The Statutory Reserve Ration has also been lowered to 9.25 percent which, according to the Central Bank, will inject additional liquidity amounting to Rs. 7.5 billion. "The Reserve Bank of India reduced SRR from 10 percent to 9 percent and then brought it down to 6 percent. It is possible that the Central Bank too will follow a similar trajectory. "As a result we can expect interest rates to come down in the future which will make the BOC Debenture a profitable investment," Rajakaruna said. BOC debenture comes in three types. One gives an annual return of 19 percent paid yearly. Another has a floating rate of return which is the weighted average 6 months Treasury bill rate + 0.75 and paid bi-annually. The third option will not pay a return until maturity where Rs.225 is paid for every Rs.100 invested in the debenture. As at 30 June 2006, BOC’s loan portfolio amounted to almost Rs. 185 billion with loans to the government amounting to Rs. 89.7 billion (48.6 percent). For the same period in 2007, loans to government amounted to 46.7 percent (Rs. 137 billion) of Rs. 294 billion. This year, loans to government amounted to 42.3 percent (Rs.126 billion) of Rs. 298 billion. "Government exposure is a concern but it is on the decline," Rajakaruna told journalists. BOC recorded strong deposit growth. In 2003 the deposit base amounted to Rs. 186 billion, in 2007, 306 billion. In 2002, the bank’s non performing loans (NPL) amounted to almost Rs. 17.5 billion, 23.9 percent of total loans. However, NPLs have declined steadily to record less than Rs. 5 billion in 2007 to 5.5 percent of total loans. NPLs peaked at 7.1 percent in March this year but by June had come down to 4.8 percent. Rajakaruna expects NPL’s to consolidate around this range, hovering around the Rs. 5 billion mark. He said the debenture issue is to strengthen BOC’s tier II capital base so as to be able to generate more credit for future expansion projects in the area of infrastructure development. He said, however, that Rs. 2 billion is being earmarked to capitalize its branch in London which will function as a subsidiary of BOC and be regulated by the Financial Systems Authority of the UK. "Being a branch of BOC, the London office did not require separate capital as it had recourse to BOC’s capital. However, the Financial Systems Authority (FSA) will evaluate the branch and will authorize it to expand its business-lines and depending on what they allow us to do the investment will be made accordingly," he said. The London branch does not give loans and it is seeking to begin credit operations and trade services with FSA approval. According to BOC sources, for the past two years or so the FSA had been asking the BOC Branch to build up necessary capital in order to be allowed to expand its operations. MBSL CEO, Gamini Karunathileka, said that BOC had the option to raise the capital through a private placement which would have been less costly with speedy results. "BOC decided to go for a public offering through debentures because it felt that the capital market in Sri Lanka needs more maturity and that ordinary people need to be given the advantage making an investment in the capital market," he said. A debenture is priced at Rs.100 and the minimum investment is Rs.10,000 for 100 debentures. "This clearly reflects that the targeted group is broad based, giving small investors an opportunity," Karunathileka said. |
